They say the markets are controlled mainly by two emotions: greed and fear. When you’re making good money on a stock, it’s tempting to say to yourself “this baby’s gonna skyrocket to the moon and I’m gonna ride it there!”. But then it pulls back and you’ve lost some of your profit, or worse you end up with a loss. Conversely, when you’re losing on a stock it’s easy to hit the panic button and pull out before all hell breaks loose. But then it turns around and you realize you’ve pulled out too soon.

To control the greed and fear monsters, you first need to determine how much you want to gain and how much you’re willing to lose before entering any position on a stock. For example, you buy a stock at $100 and you think 20% would be a fair return. So you place a limit sell order at 120. This prevents you from getting greedy if the stock rises sharply. Once you’ve reached your selling price, you exit your position and walk away with a nice profit. If the most you want to lose is 15%, you place a stop loss order at 85. Now if the stock drops to 88, you don’t panic (ideally) because you’ve allowed yourself to lose up to 15%. You should always use stops on every trade you make. This helps to remove the greed and fear factors out of the equation.